S&P Tipped Off Traders to Downgrade Sparking Selloff?

Did Standard & Poors Corp., last week tip off stock traders to its downgrade of the U.S. governments debt, sparking a significant selloff last Friday even after a better-than-expected jobs report?

Some people in the banking industry think so, and it could add another layer of controversy to the already-controversial decision of the big rating agency's to slash its assessment of U.S. government bonds from its long-held Triple-A status.

Banking industry executives interviewed by FOX Business say Standard & Poors held a series of meetings with executives of some big banks late last week, in which executives and rating agency officials discussed what the impact of a downgrade of the U.S. treasury bond might mean for the banks' own credit ratings.

One senior banking executive said meetings occurred Thursday and Friday; S&P assured officials that a downgrade of U.S. government debt would not necessarily lead to a downgrade in bank bonds even though banks have relied on unprecedented assistance from the government following the 2008 financial crisis, and a downgrade could squeeze the financial markets, the executive said.

The executive also said the heads-up by S&P served two functions: to assure banks that their ratings were not to tied to the government's, and also to prepare them for a pending downgrade and the impact that might have on the markets.

That preparation could have led to massive trading-desk speculation that began Friday morning before S&P had finally decided to slash its Triple-A rating on U.S. debt, something it had been debating for weeks. The speculation shook the markets, traders said. Despite positive economic news with the unemployment rate falling to 9.1% and the Labor Department announcing that the country added 115,000 jobs, the stock market fell from its initial highs in daily choppy trading.

By the end of the day the Dow Jones Industrial Average rose just 60.93 points, after losing 512.76 the day before based on market talk that the jobs picture would be worse than expected.

Traders at major Wall Street firms and major investors told the FOX Business Network that S&P's announcement Friday night, hours after the close, that it had downgraded the U.S. debt didnt come as a surprise.

We were well aware that something was likely to happen, said a CEO of a major money management firm. Our trading desk felt confident that S&P was about to pull the trigger.

A Standard & Poors spokesman would not deny that the ratings firm held meeting with banks on Thursday and Friday, and declined to comment further.

To be sure, chasing down the source of such frenzied trading activity is difficult, and its unclear if S&P was the source of the rumorsor even the sole source. S&P alerted officials in the Treasury Department of its decision to downgrade the countrys debt early Friday, so a leak could have come from the government side.

But if Wall Street was given a heads-up about S&Ps action, which contributed to Mondays 635-point drop in the Dow, it would raise serious questions about whether traders on Wall Street relied on non-public information to sell stocks prior to the official announcement.

Already the Senate Banking Committee is preparing to hold hearings on the downgrade, and a Congressional source says a House hearing is possible as well. The Treasury Department has said S&P made a factual mistake in its analysis, omitting some $2 trillion in additional revenues.

S&P says given the massive amounts of accumulated debt, and slow economic growth it stands by its downgrade decision.

Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.